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June 22, 2011

CBO: National Debt on Track to Nearly Double GDP in 25 Years

The nation is on a course to a “sudden fiscal crisis” — with debt to nearly double GDP in 25 years — if policymakers fail to take measured steps to halt the growing debt burden, the Congressional Budget Office said Wednesday.

In its annual long-term budget outlook, the CBO on Wednesday said lawmakers would “need to let revenues increase substantially as a percentage of GDP, decrease spending significantly from projected levels, or adopt some combination of those two approaches” if the nation is to return to what it called a “sustainable budgetary path.”

The CBO report cautioned that immediate tax hikes or budget cuts could have the unwanted effect of slowing down the economic recovery. But, it added, “the sooner that medium- and long-term changes to spending and revenues are agreed on — and the sooner they are implemented after the period of economic weakness — the smaller will be the damage to the economy from rising federal debt.”

Republicans and Democrats reacted differently to the report. Rep. Paul Ryan, D-Wis. (left),chairman of the House Budget Committee, said the coming crisis was predictable. Ryan’s Democratic counterpart on the Budget Committee, Chris Van HollenD-Md., said the parties must work together using President Barack Obama's vision as a guide.

Writing in his blog on Wednesday, CBO Director Douglas Elmendorf contrasted the cost of entitlements — Medicare, Medicaid, the Children’s Health Insurance and insurance exchange subsidies mandated under the administration’s new health care program — with the historical average for all programs. Today’s entitlement programs are projected to rise 50% — from 10% of GDP today to 15% 25 years from now. In contrast, “spending on all of the federal government’s programs and activities, excluding interest payments on debt, has averaged about 18.5 percent of GDP over the past 40 years.”

The total national debt, 69% of GDP today is on track to exceed 100% of GDP in 10 years and would balloon to nearly 190% by 2035, under the fiscal scenario the CBO describes as most likely.

According to the CBO report, failure to arrest this trend “would increase the probability of a sudden fiscal crisis, during which investors would lose confidence in the government’s ability to manage its budget and the government would thereby lose its ability to borrow at affordable rates.”

The CBO predicts such a crisis would result in harsh choices: “To restore investors’ confidence, policymakers would probably need to enact spending cuts or tax increases more drastic and painful than those that would have been necessary had the adjustments come sooner.”

Reacting to the CBO’s report, Ryan said in a statement: “We are headed for the most predictable economic crisis in American history ... As Congress debates the President’s request for an increase in the statutory debt ceiling, the CBO warns of a more ominous credit cliff — a sudden drop-off in our ability to borrow imposed by credit markets in a state of panic.”

Van Hollen had this to say: “We must put together a plan that reduces the debt in a predictable and balanced way. The House Republican budget takes a one-sided approach that ends the Medicare guarantee and slashes our investment in education, but provides tax breaks for special interests and cuts the tax rates for the super wealthy…We need a balanced plan, along the lines of what President Obama outlined in his most recent proposal, that reflects America’s priorities.”